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A report by the Group of 30 economic think tank has again turned the spotlight on corporate governance at financial institutions since the financial crisis. Financial News looks at 10 ways in which the industry needs to improve oversight at board level.

Emphasising the link between strong corporate governance and the economic stability both of individual firms and the wider global economy, the Group of 30, a non-profit body which researches international economic issues, laid out key measures that financial institutions should consider when crafting corporate governance policies.

The G30’s members include a mix of international economic leaders, including former President of the European Central Bank Jean-Claude Trichet and economist Paul Volker, former chairman of the US federal reserve.

The report, published on Thursday, was put together by a working group that included Jacob Frenkel, chairman of JP Morgan Chase International, Zhou Xiaochuan, governor of the People’s Bank of China, and William McDonough, former vice-chairman of Bank of America Merrill Lynch.

Sir David Walker, vice chairman of the G30 steering committee and senior adviser to Morgan Stanley International, said: “Since the crisis there has been an unprecedented process of financial regulatory reform to remedy these serious weaknesses that had become apparent. But better regulation by the public sector needs to be matched by private sector initiative in the form of better boardroom performance. The best assurance of financial stability will be delivered by effective governance and risk based regulation working in complement to each other.”

Financial News has distilled the 96-page report into 10 factors most important to strong governance at financial institutions

Striking a tone reminiscent of the global Occupy Wall Street protests, the report stressed the impact that the mismanagement of financial firms had on society during the financial crisis.

It called for board leadership that was sensitive to not only the firm’s performance, but also its position in the larger economy.

“FIs [financial institutions] must serve not only their shareholders, but society as a whole. This is a bedrock principle,” it said.

2) Split the roles of chief executive and chairman

Combined chief executive and chairman roles give too much power and put too much pressure and responsibility on one person, particularly given the time commitments required for each, the report said.

“To ask one person to ably fulfil both the role of CEO and the role of chair seems unreasonable,” particularly given that the role of chief executive has expanded “almost beyond the capacity of a single person,” the report said.

3) Smaller boards that are more time-intensive for members are preferable to larger groups

Of the 36 financial firms studied for the report, the average board had 14 members, more than the 10 to 12 recommended by the G30.

The report said that large groups make productive debates and efficient meetings more difficult, while smaller boards have more fruitful, candid discussions.

4) Diversity in field, gender and ethnicity strengthens boards

Following the financial crisis, greater emphasis was placed on financial expertise on the boards of banks and other firms. This, however, can lead to “groupthink” and overwhelm board members that are not financial industry veterans.

The group recommended tapping board members from countries and industries relevant to a firm’s clients in order to diversify the group’s perspective.

Gender and ethnic diversity similarly sheds new light on the board’s work, the G30 said. The added diversity should come, “not as a concession to political correctness, but because an indispensable characteristic of an effective board is its openness to different ideas, ways of thinking, and points of view."

5) Choose the strong chief executive candidate over the “star”

The “very good” candidate will be less concerned with his or her own successes than the star candidate and will be more interested in doing what is right than being right themselves, the G30 said.

Opting for less ego and a greater willingness to work with the board will ultimately lead to greater efficiencies, the group said.

6) Boards need to guide but not run institutions

The G30 stressed that boards need to give management the power and space to run financial institutions and limit themselves to guiding executives.

Noting that trying times often lead boards to cross the line between governance and management, the group stressed the need for the board to stay independent.

“It can be especially hard for board members to resist the temptation to cross the line into management because so often they themselves have been or still are managers,” the report said.

7) Have an independent and empowered chief risk operator

Highlighting the failure of risk officers to adequately influence risk-taking at firms that collapsed in the financial crisis, the G30 stressed the need for an independent CRO with adequate authority and direct access to the board-level risk committee.

8) Eliminate firewalls between directors and top executives

There should be unfettered communication between the board and executives so that the board has a true understanding of the organisation’s health and operations, the group said.

It tasked chief executives with arranging both business and social interactions between the two groups.

Pointing to a lack of communication between directors and executives before the crisis, the report said that better communication could have alerted boards to problems earlier.

9) The chairman and some non-executive directors should meet with large shareholders at least once a year

Such interactions will better communicate boards’ priorities, give leaders insight into shareholder concerns and help them stay ahead of negative proxy resolutions.

10) Have a clearly articulated culture that rewards success – but not at the cost of values

The G30 said firms should be transparent with employees about their risk, customer, and performance priorities.

“A good performance culture will reward those whose successes uphold the organization’s institutional values and penalize those who subvert those values,” the report said, concluding that “economic performance at any price is failure.”